Mapping Ethical Investment in the Indonesian Capital Market: A Cluster Analysis of ESG and Sharia-Compliant Stocks Relative to the LQ45 Index
Abstract
Purpose: This study aims to map ethical investment profiles in the Indonesian capital market by examining how Environmental, Social, and Governance (ESG) performance, Sharia compliance, and financial characteristics align with one another. Methodology: The final sample comprises 43 stocks with complete ESG, return, and volatility data, drawn from ISSI and LQ45 constituents, observed over a 90-day window from May to July 2025. Three dimensions, ESG score, quarterly return, and short-term volatility, were clustered using K-Means, benchmarking ISSI-indexed Sharia stocks against LQ45 conventional constituents and validating clusters with internal validation metrics. The 2025 window aligns with the newly released 2025 ESG scores and IDX constituent lists, capturing recent post-pandemic conditions. Result: Three distinct clusters with heterogeneous sustainability and financial profiles were identified. Sharia-compliant stocks constitute the entire highest-ESG cluster (Cluster 2, 10 of 10 stocks, 100%) and most of the low-volatility defensive cluster (Cluster 0, 15 of 18 stocks, 83.3%), together comprising 33 of the 43 sample stocks (76.7%). Conclusion: Sharia-compliant stocks are, on average, competitive with or superior to leading conventional stocks in sustainability and risk-adjusted characteristics. Implication: These findings have implications for ethical investors and regulators seeking to strengthen Indonesia's Islamic capital market. Originality: Despite the conceptual compatibility between ESG and Sharia investment criteria, empirical evidence comparing ESG performance, returns, and volatility of Sharia-compliant and conventional stocks in Indonesia remains limited. This study contributes by jointly clustering three dimensions, benchmarking ISSI against LQ45, and validating clusters with internal validation metrics, an approach absent from prior comparative studies.
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Elamer, A. A., & Boulhaga, M. (2024). ESG controversies and corporate performance: The moderating effect of governance mechanisms and ESG practices. Corporate Social Responsibility and Environmental Management. 31(4). 3312–3327. https://doi.org/10.1002/csr.2749
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